Active Asset Allocation Among a Large Set of Stocks: How Effective is the Parametric Rule?

Abstract

In this study we measure the value of active money management. We explore this issue by comprehensively examining the parametric rule proposed by Brandt, Santa-Clara and Valkanov (2009) (the BSV rule) out-of-sample for cross-sectional portfolio choice among a large number of assets and comparing this rule to the mean-variance (MV) rule and the naive 1/N rule recently advocated by DeMiguel, Garlappi and Uppal (2009). We find that the BSV rule outperforms both the MV and 1/N rules and the outperformance is robust to investment horizons and stock market states. The BSV rule is effective for investors with different preferences or investment opportunities either. The effectiveness of the BSV rule is robust to data screening criteria, estimation periods, portfolio performance evaluation models, the business cycle, and stock market states. Our results suggest that the BSV rule is useful.